What are the benefits of a PIE structure

Widely-held companies and unit trusts that meet certain eligibility criteria can elect to be “Portfolio Investment Entities” for tax purposes. For “Multi-rate PIEs”, shareholders and unitholders are treated as if they own the underlying investments of the company or unit trust and are taxed on their proportional share of the net income from these investments at their own marginal tax rate, capped at 28%.

For Funds and Syndicates which are structured as Portfolio Investment Entities (PIEs) for tax purposes, a share of the PIE’s net taxable income is allocated to you based on your interest in the Fund or Syndicate. The Fund or Syndicate will pay tax on your share of this net income at your notified Prescribed Investor Rate (‘PIR’). This will be deducted from your monthly distribution.

PIRs are determined by whether you are investing as an individual, trust, estate, company, incorporated society, or partnership. If you are an individual, it will also depend on your taxable income. Your PIR may be 0%, 10.5%, 17.5% or 28%. To work out your PIR visit the Inland Revenue website at www.ird.govt.nz and search for prescribed investor rate, contact Inland Revenue on 0800 227 774 or speak to your tax adviser.

You need to advise us of both your PIR and your IRD number otherwise we apply the default PIR of 28%. You must tell us every time your PIR changes. We will remind you annually to check the rate. Inland Revenue may tell us to apply another PIR to you.

The Manager will send you an annual tax statement at the end of each financial year which will summarise your share of the PIEs net taxable income and the PIE tax paid on your behalf to Inland Revenue. You do not normally pay any further tax if your PIR is above 0% and you have provided the correct PIR.

You benefit directly from the tax deductions of the Fund or Syndicate, including tax depreciation and unrestricted interest deductions.

Under the PIE tax regime, capital gains made on most investments in New Zealand shares and unit trusts, and most Australian listed shares, are specifically not taxable irrespective of the level of trading undertaken (dividends on those shares are taxable). This rule does not apply to real estate, so ordinary principles apply.

New Zealand does not generally tax capital gains on commercial real estate investments. The 10-year bright-line test that applies to residential property investment does not apply to commercial property. Gains realised on the sale of real estate investments are tax free if the investment was made for the purpose of deriving rental income and long-term capital growth.

There are a number of specific tax rules which treat certain capital gains as income. For example, there are tax rules that apply to speculators, land developers, dealers and investors who purchase property with the intention of selling it. These rules should not apply to your Fund or Syndicate which will acquire real estate for the purpose of deriving rental income and long-term capital growth.

In summary, the PIE tax regime provides a number of advantages to investors, including:

  1. The Manager calculates and pays your tax on your behalf to Inland Revenue.
  2. You do not normally pay any further tax if your PIR is above 0% and you have provided the correct PIR.
  3. The highest PIR is capped at 28%, hence there can be tax advantages for individuals and trusts on a 33% or 39% marginal tax rate.
  4. You benefit directly from the tax deductions of the Fund or Syndicate, including tax depreciation. This means that your taxable income may be less than your distribution.
  5. Unrestricted interest deductions on debt used to finance commercial real estate.
  6. Capital gains realised by the Fund or Syndicate may be distributed to investors tax-free.

Randolph van der Burgh
August 30, 2021

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